After a few days of bull market pullback, ETH prices once again crossed 3900 USD. Reflecting on Ethereum's development over the past year, many complex factors and emotions are at play. On one hand, the Cancun upgrade was successfully completed, and the spot ETF was officially approved, presenting a new bull market appearance from both technical and fundamental perspectives. However, on the other hand, as Bitcoin, SOL, and BNB continuously broke historical highs, ETH's price still lingered around the 4000 USD mark.
From the ETH price chart above, it can be seen that Ethereum has gone through three major phases this year, with the price increases in each phase corresponding to different reasons. At the beginning of the year, the approval of Bitcoin spot ETFs led to a rise in Ethereum's price following market sentiment, briefly surpassing 4100 USD, but by the end of March, it began to decline along with the broader market. Additionally, due to the strong surge of SOL and its ecosystem, the Ethereum ecosystem faces significant liquidity outflows.
In May, the Ethereum spot ETF was approved, and the price briefly surged, but its demand was not as strong as that of Bitcoin. The initial market reaction to the launch of the Ethereum ETF was negative, as speculative investors who bought Grayscale's Ethereum trust and expected its conversion to an ETF took profits, leading to a 1 billion USD outflow of funds, placing downward pressure on Ethereum's price. Furthermore, the narrative of ETH leaning towards tech innovation compared to BTC's 'digital gold' is less appealing to traditional markets, and the SEC's prohibition of staking features for Ethereum spot ETFs objectively weakened its attractiveness.
After this, the Ethereum Foundation, restaking ecosystem, and roadmap disputes followed, marking a dark period for Ethereum.
In November, as the US elections settled, the pro-crypto Republican Party and Trump brought stronger confidence and liquidity injection to the entire crypto ecosystem, leading to the third wave of increases for Ethereum this year. This rise is different from previous ones, as institutions are clearly entering the market, and the improvement in liquidity fundamentals indicates what institutions recognize and favor; Ethereum is destined to continue its 'world computer' mission.
Improvement in liquidity fundamentals
Since December, Ethereum spot ETFs have seen a net inflow of over 2.2 billion USD for half a month. Nate Geraci, president of The ETF Store, stated on social media that advisors and institutional investors are just beginning to pay attention to this area.
In the third quarter of this year, banks like Morgan Stanley, JPMorgan, and Goldman Sachs significantly increased their holdings of Bitcoin ETFs, with quarterly holdings nearly doubling, but their investment scope is not limited to Bitcoin. According to the latest 13F filings, these institutions have also begun purchasing Ethereum spot ETFs since then.
Additionally, in the last two quarters, the Wisconsin State Investment Board and the Michigan Retirement System significantly increased their holdings of Bitcoin spot ETFs, with Michigan further purchasing over 13 million USD worth of Ethereum spot ETFs in the third quarter. This indicates that pension funds, which symbolize a low-risk preference and long-term investment, not only recognize Bitcoin as a digital value storage but also value Ethereum's growth potential.
Upon the approval of Ethereum spot ETFs, JPMorgan pointed out in a report that the demand for Ethereum spot ETFs will be significantly lower than that for Bitcoin spot ETFs. However, the report predicts that the remaining time this year will see net inflows of up to 3 billion USD for spot Ethereum ETFs, and if staking is allowed, this figure could reach 6 billion USD.
Jay Jacobs, head of BlackRock's US thematic and active ETFs, stated at the 'ETFs in Depth' conference that 'our exploration of Bitcoin, especially Ethereum, is just the tip of the iceberg. Only a very small number of clients hold (IBIT and ETHA), so our current focus is on this area rather than launching new altcoin ETFs.'
In a Blockworks Research survey, the vast majority (69.2%) of respondents currently hold ETH, with 78.8% being investment firms or asset management companies. This indicates that institutional willingness to participate in ETH staking has reached a critical scale, driven by yield generation and network security contributions.
Institutions are actively participating in ETH staking, but the level and methods of participation vary. Regulatory uncertainty has led to differing attitudes among parties; some institutions are cautious, while others are less concerned. Institutional participants have a high awareness of the operational aspects and risks associated with staking.
Trend reversal
Since the FTX collapse, Coinbase, Kraken, Ripple, and others have faced severe crackdowns from US regulators like the SEC. Many crypto projects cannot even open accounts with mainstream US banks. Traditional financial institution investors who entered the market during the last bull run due to DeFi also suffered huge losses. Large funds like Toma Bravo, Silver Lake, Tiger, and Cotu faced setbacks not only at FTX but also invested at high valuations in crypto projects that have not delivered on their grand promises, and funds have yet to return.
In the second half of 2022, many DeFi projects were forced to migrate outside the US. According to Alliance DAO co-founder qw, "Two years ago, about 80% of compliant crypto startups were located in the US; however, this proportion has been steadily declining and is currently only about 20%."
But on November 6, after Trump's victory, the green light that the US financial system had long been waiting for turned on.
Trump saves the crypto world
Trump's victory undoubtedly cleared the regulatory clouds for institutional adoption.
By establishing a Department of Government Efficiency, directly gathering a series of Wall Street financial elites like Musk, Peter Thiel, and Marc Andreessen under its leadership, after appointing Paul Atkins as SEC chairman, Trump also appointed PayPal co-founder David Sacks as the 'White House Head of AI and Cryptocurrency Affairs.' A series of measures show that Trump intends to build a government with relaxed cryptocurrency regulations.
JPMorgan analysts indicated that several stalled cryptocurrency bills could quickly gain approval after Trump takes office, including the 21st Century Financial Innovation and Technology Act (FIT21), which could provide much-needed regulatory clarity for the crypto industry by clearly defining the regulatory responsibilities of the SEC and CFTC. They noted that as the regulatory framework becomes clearer, the SEC's strategy of increased enforcement could evolve into a more collaborative approach, and its restrictions on banks holding digital assets (Staff Accounting Bulletin No. 121) (SAB 121) might be abolished.
Legal actions against companies like Coinbase may also ease, settle, or even be withdrawn. Regulatory notifications sent to companies like Robinhood and Uniswap could be reconsidered, thereby reducing the broader crypto industry's litigation risks.
In addition to departmental and legislative reforms, the Trump team is also considering significant cuts, mergers, or even the elimination of major banking regulatory agencies in Washington. Sources indicated that Trump advisors in discussions with potential candidates for banking regulatory agencies inquired whether some government efficiency personnel could abolish the Federal Deposit Insurance Corporation (FDIC) among other things. Trump advisors also asked about potential candidates for the FDIC and the Office of the Comptroller of the Currency. Additionally, plans were proposed to merge or completely reform the FDIC, the Office of the Comptroller of the Currency, and the Federal Reserve.
As policy dividends gradually unfold, larger-scale institutional funds in the US are expected to return to the crypto market.
DeFi revival in progress
Family offices, endowment funds, pension plans, and other more stable capitals will not only invest in Ethereum spot ETFs but will also re-enter the DeFi sector that has been validated in the previous cycle.
Compared to 2021, the total supply of stablecoins has reached an all-time high. In the month and a half following Trump's victory, the total amount of stablecoins has increased by nearly 25 billion USD, with the current total market capitalization of stablecoins reaching 202.2 billion USD.
Coinbase, as the leader among US crypto-listed companies, has not only contributed financially politically this year but has also made strides in the DeFi space. It serves as the largest crypto ETF custodian on one hand and has launched cbBTC on the other.
Due to cbBTC facing the same custody and counterparty risks as most Bitcoin ETFs, some traditional financial institutions may reassess whether to continue paying fees to hold Bitcoin ETFs and shift towards participating in the DeFi ecosystem at almost zero cost. This shift could bring capital inflows to market-tested DeFi protocols, especially when the yields provided by DeFi are more attractive compared to traditional finance.
Another major DeFi sector in this cycle is RWA. In March this year, BlackRock entered the RWA sector with great fanfare by collaborating with the US tokenization platform Securitize to issue the tokenized fund BUIDL (BlackRock USD Institutional Digital Liquidity Fund). Capital giants like Apollo and Blackstone, which manage large funds, are also preparing to enter this market, bringing a significant influx of liquidity.
After the Trump family launched its DeFi project, compliant DeFi has been a hot topic of discussion. Established DeFi projects like Uniswap, Aave, and Lido immediately reacted to Trump's victory with price increases, while emerging DeFi projects like COW, ENA, and ONDO also reached new highs.
Meanwhile, Trump's crypto DeFi project WLFI has recently been frequently trading Ethereum-based tokens, exchanging 5 million USDC for 1,325 ETH in multiple transactions, and subsequently buying 10 million USD in ETH, 1 million USD in LINK, and 1 million USD in AAVE. Recent news of whales increasing their ETH holdings suggests that both institutions and whale accounts are refocusing on the Ethereum ecosystem.
Recently, the performance of both new and old projects in the DeFi sector has been noteworthy in terms of price. Currently, DeFi's Total Value Locked (TVL) is approximately 100 billion USD, while the total value of cryptocurrencies and related assets is around 4 trillion USD. Only 2% of the capital actively engaged in the DeFi space is small compared to the overall scale of the cryptocurrency market. This suggests that there is still significant growth potential for DeFi under improving regulatory conditions.
Aave is a typical beneficiary of this round of 'capital inflow.' Its price broke through before Trump's victory, and subsequently, its TVL and income showed explosive growth: TVL surpassed the historical high of 22 billion USD in October 2021; token prices rose from an annual low of 80 USDT to break through the March high of 140 USDT in early September and accelerated upwards at the end of November; the protocol's total daily revenue exceeded the second-highest peak of September 2021, with weekly income setting a new historical high.
Although Aave has recently upgraded to V4, the technical innovation may not be sufficient to support such a significant increase in scale. Regulatory and capital-driven motivations are clearly more important logic, and this push may even spill over to the NFT sector, which also received institutional favor in the previous cycle.
The future of Ethereum
However, Ethereum faced a series of controversies and discussions regarding ecological development in the middle of this year. With the rise of Solana, both new and old public chains began to seize the developers and user base of Ethereum, and the ecosystem started to shake. Ethereum seems to have forgotten its original goal. As the first blockchain to create smart contracts, Ethereum successfully made major institutional investors pay for it in the last cycle through its first-mover advantage. Whether in DeFi, chain games, or NFTs and the metaverse, it is inescapable from the Ethereum ecosystem, and its 'world computer' mission has deeply ingrained in people's hearts.
Despite the optimistic improvement in the liquidity fundamentals of Ethereum, on the Ethereum side, various on-chain data indicators such as average daily transaction numbers, gas fees, and active addresses have not seen significant growth. This indicates that the on-chain activity of Ethereum has not increased in tandem with its price, and block space remains excessive.
In recent years, Ethereum's focus has been on building the infrastructure of cryptocurrencies, providing the market with a large amount of inexpensive block space. This initiative has enhanced Dapp's access performance to blocks, reduced transaction costs for L2 scaling solutions, but on the other hand, due to insufficient market liquidity and sluggish trading demand, Ethereum's vast block space has not been fully utilized.
However, this is not a real issue in the long run. As mentioned earlier, institutional funds are gradually flowing back and even starting to build dedicated blockchain use cases. For Ethereum, which possesses security and flexible architecture, to B is where its advantages lie. It not only has an overwhelming advantage in security but is also compatible with numerous EVM projects, providing developers with an option that is almost 'impossible to be fired.'
The long-term value of Ethereum will depend on the scarcity of its block resources, that is, the actual and sustained demand for Ethereum block settlement in the world. As institutions and applications continue to pour in, this scarcity will become increasingly prominent, laying a more solid foundation for Ethereum's value. Ethereum is an institutional world computer. Starting with DeFi, institutions will solve the problems of Ethereum's block surplus and roadmap disputes in the future.
At the beginning of December, Ethereum researcher Jon Charbonneau wrote a lengthy analysis on why Ethereum needs a clearer 'North Star' goal, suggesting that the ecological strengths of Ethereum should converge on the concept of a 'world computer,' similar to Bitcoin's 'digital gold' and Solana's 'on-chain Nasdaq.'
Ten years have passed, and Ethereum is no longer in its startup phase. The future of Ethereum is now clear for the next decade.
